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Y-1 LEISURE PHILIPPINES, G.R. No. 207161

INC., YATS INTERNATIONAL
LTD. and Y-1 CLUBS AND Present:
RESORTS, INC.,
Petitioners, SERENO, CJ.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
- versus - DEL CASTILLO,
VILLARAMA, JR.,
PEREZ,
MENDOZA,
REYES,*
PERLAS-BERNABE,
LEONEN, and
JARDELEZA, JJ.

JAMES YU, Promulgated:

Respondent. September 8, 2015
f\F~-f:... e-

x--------------------------------------------x
DECISION

MENDOZA, J.:

The present case attempts to unravel whether the transfer of all or

substantially all the assets of a corporation under Section 40 of the
Corporation Co9e carries with it the assumption of corporate liabilities.

•On leave.

~
DECISION 2 G.R. No. 207161

This is a petition for review on certiorari under Rule 45 of the Rules

of Court assailing the January 30, 2012 Decision1 and the April 29, 2013
Resolution2 of the Court of Appeals (CA), in CA-G.R. CV No. 96036, which
affirmed with modification the August 31, 2010 Decision3 of the Regional
Trial Court, Branch 81, Quezon City(RTC).

The Facts

Mt. Arayat Development Co. Inc. (MADCI) was a real estate

development corporation, which was registered4 on February 7, 1996 before
the Security and Exchange Commission (SEC). On the other hand,
respondent James Yu (Yu) was a businessman, interested in purchasing golf
and country club shares.

Sometime in 1997, MADCI offered for sale shares of a golf and

country club located in the vicinity of Mt. Arayat in Arayat, Pampanga, for
the price of P550.00 per share. Relying on the representation of MADCI’s
brokers and sales agents, Yu bought 500 golf and 150 country club shares
for a total price of P650,000.00 which he paid by installment with fourteen
(14) Far East Bank and Trust Company (FEBTC) checks.5

Upon full payment of the shares to MADCI, Yu visited the supposed

site of the golf and country club and discovered that it was non-existent. In a
letter, dated February 5, 2000, Yu demanded from MADCI that his payment
be returned to him. 6 MADCI recognized that Yu had an investment of
P650,000.00, but the latter had not yet received any refund.7

On August 14, 2000, Yu filed with the RTC a complaint 8 for

collection of sum of money and damages with prayer for preliminary
attachment against MADCI and its president Rogelio Sangil (Sangil) to
recover his payment for the purchase of golf and country club shares. In his
transactions with MADCI, Yu alleged that he dealt with Sangil, who used
MADCI’s corporate personality to defraud him.

1
Penned by Associate Justice Remedios A. Salazar-Fernando, with Associate Justices Mario V. Lopez and
Amy C. Lazaro-Javier, concurring; rollo, pp. 31-57.
2
Id. at 58-60.
3
Penned by Judge Ma. Theresa L. Dela Torre-Yadao; id. at 61-76.
4
Records, Vol. II, p. 787.
5
Id. at 770-782.
6
Id. at 783-785.
7
Id. at 857.
8
Records, Vol. I, pp. 1-6.
DECISION 3 G.R. No. 207161

In his Answer, 9 Sangil alleged that Yu dealt with MADCI as a

juridical person and that he did not benefit from the sale of shares. He added
that the return of Yu’s money was no longer possible because its approval
had been blocked by the new set of officers of MADCI, which controlled the
majority of its board of directors.

In its Answer,10 MADCI claimed that it was Sangil who defrauded Yu.
It invoked the Memorandum of Agreement11 (MOA), dated May 29, 1999,
entered into by MADCI, Sangil and petitioner Yats International Ltd. (YIL).
Under the MOA, Sangil undertook to redeem MADCI proprietary shares
sold to third persons or settle in full all their claims for refund of payments.12
Thus, it was MADCI’s position that Sangil should be ultimately liable to
refund the payment for shares purchased.

After the pre-trial, Yu filed an Amended Complaint,13 wherein he

also impleaded YIL, Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts,
Inc. (YICRI). According to Yu, he discovered in the Registry of Deeds of
Pampanga that, substantially, all the assets of MADCI, consisting of one
hundred twenty (120) hectares of land located in Magalang, Pampanga, were
sold to YIL, YILPI and YICRI. The transfer was done in fraud of MADCI’s
creditors, and without the required approval of its stockholders and board of
directors under Section 40 of the Corporation Code. Yu also alleged that
Sangil even filed a case in Pampanga which assailed the said irregular
transfers of lands.

In their Answer,14 YIL, YILPI and YICRI alleged that they only had
an interest in MADCI in 1999 when YIL bought some of its corporate shares
pursuant to the MOA. This occurred two (2) years after Yu bought his golf
and country club shares from MADCI. As a mere stockholder of MADCI,
YIL could not be held responsible for the liabilities of the corporation. As to
the transfer of properties from MADCI to YILPI 15 and subsequently to
YICRI, 16 they averred that it was not undertaken to defraud MADCI’s
creditors and it was done in accordance with the MOA. In fact, it was
stipulated in the MOA that Sangil undertook to settle all claims for refund of
third parties.

9
Id. at 97-100.
10
Id. at 138-141.
11
Id. at 142-149.
12
Id. at 163.
13
Id. at 239-248.
14
Id. at 584-591.
15
Records, Vol. II, p. 817.
16
Id. at 822.
DECISION 4 G.R. No. 207161

During the trial, the MOA was presented before the RTC. It stated that
Sangil controlled 60% of the capital stock of MADCI, while the latter owned
120 hectares of agricultural land in Magalang, Pampanga, the property
intended for the development of a golf course; that YIL was to subscribe to
the remaining 40% of the capital stock of MADCI for a consideration of
P31,000,000.00; that YIL also gave P500,000.00 to acquire the shares of
minority stockholders; that as a condition for YIL’s subscription, MADCI
and Sangil were obligated to obtain several government permits, such as an
environmental compliance certificate and land conversion permit; that
should MADCI and Sangil fail in their obligations, they must return the
amounts paid by YIL with interests; that if they would still fail to return the
same, YIL would be authorized to sell the 120 hectare land to satisfy their
obligation; and that, as an additional security, Sangil undertook to redeem all
the MADCI proprietary shares sold to third parties or to settle in full all their
claims for refund.

Sangil then testified that MADCI failed to develop the golf course
because its properties were taken over by YIL after he allegedly violated the
MOA. 17 The lands of MADCI were eventually sold to YICRI for a
consideration of P9.3 million, which was definitely lower than their market
price.18 Unfortunately, the case assailing the transfers was dismissed by a
trial court in Pampanga.19

The president and chief executive officer of YILPI and YICRI, and
managing director of YIL, Denny On Yat Wang (Wang), was presented as a
witness by YIL. He testified that YIL was an investment company engaged
in the development of real estates, projects, leisure, tourism, and related
businesses. 20 He explained that YIL subscribed to the shares of MADCI
because it was interested in its golf course development project in
Pampanga.21 Thus, he signed the MOA on behalf of YIL and he paid P31.5
million to subscribe to MADCI’s shares, subject to the fulfilment of Sangil’s
obligations.22

Wang further testified that the MOA stipulated that MADCI would
execute a special power of attorney in his favor, empowering him to sell the
property of MADCI in case of default in the performance of obligations.23
Due to Sangil’s subsequent default, a deed of absolute sale over the lands of

17
TSN, July 13, 2007, p. 10.
18
Id. at 7.
19
Id. at 25.
20
TSN, November 7, 2008, p. 13.
21
TSN, September 11, 2009, p. 10.
22
TSN, November 7, 2008, p. 19.
23
Id. at 25.
DECISION 5 G.R. No. 207161

MADCI was eventually executed in favor of YICRI, its designated

company.24 Wang also stated that, aside from its lands, MADCI had other
assets in the form of loan advances of its directors.25

The RTC Ruling

In its August 31, 2010 Decision, the RTC ruled that because MADCI
did not deny its contractual obligation with Yu, it must be liable for the
return of his payments. The trial court also ruled that Sangil should be
solidarily liable with MADCI because he used the latter as a mere alter ego
or business conduit. The RTC was convinced that Sangil had absolute
control over the corporation and he started selling golf and country club
shares under the guise of MADCI even without clearance from SEC.

The RTC, however, exonerated YIL, YILPI and YICRI from liability
because they were not part of the transactions between MADCI and Sangil,
on one hand and Yu, on the other hand. It opined that YIL, YILPI and
YICRI even had the foresight of protecting the creditors of MADCI when
they made Sangil responsible for settling the claims of refunds of thirds
persons in the proprietary shares. The decretal portion of the decision reads:

WHEREFORE, premises considered, judgment is hereby

rendered as follows:

1. Ordering defendants Mt. Arayat Development

Corporation, Inc. and Rogelio Sangil to pay plaintiff James Yu
jointly and severally the amounts of P650,000.04 with 6% legal rate
of interest from the filing of the amended complaint until full
payment and and P50,000.00 as attorney’s fees.

2. Dismissing the instant case against defendant Y-I

Leisure Philippines, Inc., YATS International Limited and Y-I Clubs
and Resorts, Inc.; and

3. Dismissing the counterclaims of Y-I Leisure

Philippines, Inc., YATS International Limited and Y-I Clubs and
Resorts, Inc.

SO ORDERED.26

In two separate appeals, the parties elevated the case to the CA.

24
Id. at 29.
25
Id. at 32.
26
Rollo, pp. 75-76.
DECISION 6 G.R. No. 207161

The CA Ruling

In its assailed Decision, dated January 30, 2012, the CA partly

granted the appeals and modified the RTC decision by holding YIL and its
companies, YILPI and YICRI, jointly and severally, liable for the
satisfaction of Yu’s claim.

The CA held that the sale of lands between MADCI and YIL must be
upheld because Yu failed to prove that it was simulated or that fraud was
employed. This did not mean, however, that YIL and its companies were
free from any liability for the payment of Yu’s claim.

The CA explained that YIL, YILPI and YICRI could not escape
liability by simply invoking the provision in the MOA that Sangil undertook
the responsibility of paying all the creditors’ claims for refund. The
provision was, in effect, a novation under Article 1293 of the Civil Code,
specifically the substitution of debtors. Considering that Yu, as creditor of
MADCI, had no knowledge of the “change of debtors,” the MOA could not
validly take effect against him. Accordingly, MADCI remained to be a
debtor of Yu.

Consequently, as the CA further held, the transfer of the entire assets

of MADCI to YICRI should not prejudice the transferor’s creditors. Citing
the case of Caltex Philippines, Inc. v. PNOC Shipping and Transport
Corporation 27 (Caltex), the CA ruled that the sale by MADCI of all its
corporate assets to YIL and its companies necessarily included the
assumption of the its liabilities. Otherwise, the assets were put beyond the
reach of the creditors, like Yu. The CA stated that the liability of YIL and its
companies was determined not by their participation in the sale of the golf
and country club shares, but by the fact that they bought the entire assets of
MADCI and its creditors might not have other means of collecting the
amounts due to them, except by going after the assets sold.

Anent Sangil’s liability, the CA ruled that he could not use the
separate corporate personality of MADCI as a tool to evade his existing
personal obligations under the MOA. The dispositive portion of the decision
reads:
WHEREFORE, the appeals are PARTLY GRANTED.
Accordingly, the assailed Decision dated August 31, 2010 in Civil
Case No. Q-00-41579 of the RTC of Quezon City, Branch 81, is
hereby AFFIRMED WITH MODIFICATION, in that defendants-
27
530 Phil. 149 (2006).
DECISION 7 G.R. No. 207161

appellees YIL, YILPI and YICRI are hereby held jointly and
severally liable with defendant-appellee MADCI and defendant-
appellant Sangil for the satisfaction of plaintiff-appellant Yu’s claim.

In all other respects, the assailed decision stands.

SO ORDERED.28

YIL and its companies, YILPI and YICRI, moved for reconsideration,
but their motion was denied by the CA in its assailed Resolution, dated April
29, 2013.

Hence, this petition.

ISSUE

WHETHER OR NOT THE COURT OF APPEALS ERRED IN

RULING THAT PETITIONERS YATS GROUP SHOULD BE
HELD JOINTLY AND SEVERALLY LIABLE TO RESPONDENT
YU DESPITE THE ABSENCE OF FRAUD IN THE SALE OF
ASSETS AND BAD FAITH ON THE PART OF PETITIONERS
YATS GROUP.29

Petitioners YIL, YILPI and YICRI contend that the facts of Caltex are
not on all fours with the case at bench. In Caltex, there was an express
stipulation of the assumption of all the obligations of the judgment debtor.
Here, there was no stipulation whatsoever stating that the petitioners shall
assume the payment of MADCI’s debts.

The petitioners also argue that fraud must exist to hold third parties
liable. The sale in this case was not in any way tainted by any of the “badges
of fraud” cited in Oria v. McMicking.30 The CA itself stated that the alleged
simulation of the sale was not established by respondent Yu. Moreover,
Article 1383 of the Civil Code requires that the creditor must prove that he
has no other legal remedy to satisfy his claim. Such requirement must be
followed whether by an action for rescission or action for sum of money.

On September 20, 2013, respondent Yu filed his Comment. 31 He

asserted that the CA correctly applied Caltex in the present case as the lands
sold to the petitioners were the only assets of MADCI. After the sale,
MADCI became incapable of continuing its business, and its corporate
existence has just remained to this day in a virtual state of suspended

28
Rollo, p. 56.
29
Id. at 17.
30
21 Phil. 243 (1912).
31
Rollo, pp. 85-92.
DECISION 8 G.R. No. 207161

animation. Thus, unless the creditors had agreed to the sale of all the assets
of the corporation and had accepted the purchasing corporation as the new
debtor, sufficient assets should have been reserved to pay their claims.

On June 19, 2014, the petitioners filed their Reply,32 reiterating their
previous argument that the element of fraud was required in order for a third
party buyer to be liable to the seller’s creditors.

The Court’s Ruling

The petition lacks merit.

To recapitulate, respondent Yu bought several golf and country club

shares from MADCI. Regrettably, the latter did not develop the supposed
project. Yu then demanded the return of his payment, but MADCI could not
return it anymore because all its assets had been transferred. Through the
acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI.
Thus, Yu now claims that the petitioners inherited the obligations of
MADCI. On the other hand, the petitioners counter that they did not assume
such liabilities because the transfer of assets was not committed in fraud of
the MADCI’s creditors.

Hence, the issue at hand presents a complex question of law - whether

fraud must exist in the transfer of all the corporate assets in order for the
transferee to assume the liabilities of the transferor. To resolve this issue, a
review of the laws and jurisprudence concerning corporate assumption of
liabilities must be undertaken.

Background on the
corporate assumption of
liabilities

In the 1965 case of Nell v. Pacific Farms, Inc., 33 the Court first
pronounced the rule regarding the transfer of all the assets of one
corporation to another (hereafter referred to as the Nell Doctrine) as follows:

Generally, where one corporation sells or otherwise

transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except:

32
Id. at 99-103.
33
122 Phil. 825 (1965).
DECISION 9 G.R. No. 207161

1. Where the purchaser expressly or impliedly agrees to

assume such debts;

2. Where the transaction amounts to a consolidation or

merger of the corporations;

3. Where the purchasing corporation is merely a

continuation of the selling corporation; and

4. Where the transaction is entered into fraudulently in

order to escape liability for such debts.

The Nell Doctrine states the general rule that the transfer of all the
assets of a corporation to another shall not render the latter liable to the
liabilities of the transferor. If any of the above-cited exceptions are present,
then the transferee corporation shall assume the liabilities of the transferor.

Legal bases of the Nell

Doctrine

An evaluation of our contract and corporation laws validates that the

Nell Doctrine is fully supported by Philippine statutes. The general rule
expressed by the doctrine reflects the principle of relativity under Article
1311 34 of the Civil Code. Contracts, including the rights and obligations
arising therefrom, are valid and binding only between the contracting parties
and their successors-in-interest. Thus, despite the sale of all corporate assets,
the transferee corporation cannot be prejudiced as it is not in privity with the
contracts between the transferor corporation and its creditors.

The first exception under the Nell Doctrine, where the transferee
corporation expressly or impliedly agrees to assume the transferor’s debts, is
provided under Article 2047 35 of the Civil Code. When a person binds
himself solidarily with the principal debtor, then a contract of suretyship is
produced. Necessarily, the corporation which expressly or impliedly agrees
to assume the transferor’s debts shall be liable to the same.

34
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or
by provision of law. The heir is not liable beyond the value of the property he received from the decedent.
xxx
35
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the contract is called a suretyship.
DECISION 10 G.R. No. 207161

The second exception under the doctrine, as to the merger and

consolidation of corporations, is well-established under Sections 76 to 80,
Title X of the Corporation Code. If the transfer of assets of one
corporation to another amounts to a merger or consolidation, then the
transferee corporation must take over the liabilities of the transferor.

Another exception of the doctrine, where the sale of all corporate

assets is entered into fraudulently to escape liability for transferor’s debts,
can be found under Article 1388 of the Civil Code. It provides that whoever
acquires in bad faith the things alienated in fraud of creditors, shall
indemnify the latter for damages suffered. Thus, if there is fraud in the
transfer of all the assets of the transferor corporation, its creditors can hold
the transferee liable.

The legal basis of the last in the four (4) exceptions to the Nell
Doctrine, where the purchasing corporation is merely a continuation of the
selling corporation, is challenging to determine. In his book, Philippine
Corporate Law,36 Dean Cesar Villanueva explained that this exception
contemplates the “business-enterprise transfer.” In such transfer, the
transferee corporation’s interest goes beyond the assets of the transferor’s
assets and its desires to acquire the latter’s business enterprise, including its
goodwill.

In Villa Rey Transit, Inc. v. Ferrer,37 the Court held that when one
were to buy the business of another as a going concern, he would usually
wish to keep it going; he would wish to get the location, the building, the
stock in trade, and the customers. He would wish to step into the seller's
shoes and to enjoy the same business relations with other men. He would be
willing to pay much more if he could get the "good will" of the business,
meaning by this, the good will of the customers, that they may continue to
tread the old footpath to his door and maintain with him the business
relations enjoyed by the seller.

In other words, in this last exception, the transferee purchases not only
the assets of the transferor, but also its business. As a result of the sale, the
transferor is merely left with its juridical existence, devoid of its industry
and earning capacity. Fittingly, the proper provision of law that is
contemplated by this exception would be Section 40 of the Corporation
Code,38 which provides:

36
2010 ed., p. 682.
37
134 Phil. 796 (1968).
38
See Villanueva, Philippine Corporate Law, 2010 ed., p. 684.
DECISION 11 G.R. No. 207161

Sec. 40. Sale or other disposition of assets. - Subject to the

provisions of existing laws on illegal combinations and monopolies,
a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose
of all or substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least
two-thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed
action and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided,
That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover

substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business
or accomplishing the purpose for which it was incorporated.

After such authorization or approval by the stockholders or

members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge or
other disposition of property and assets, subject to the rights of
third parties under any contract relating thereto, without further
action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of

any corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in
the usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets
be appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with

voting rights, the vote of at least a majority of the trustees in office
will be sufficient authorization for the corporation to enter into any
transaction authorized by this section.

[Emphases Supplied]
DECISION 12 G.R. No. 207161

To reiterate, Section 40 refers to the sale, lease, exchange or

disposition of all or substantially all of the corporation's assets, including its
goodwill.39 The sale under this provision does not contemplate an ordinary
sale of all corporate assets; the transfer must be of such degree that the
transferor corporation is rendered incapable of continuing its business or its
corporate purpose.40

Section 40 suitably reflects the business-enterprise transfer under the

exception of the Nell Doctrine because the purchasing or transferee
corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the
assets but also the business of the transferor corporation, then the liabilities
of the latter are inevitably assigned to the former.

It must be clarified, however, that not every transfer of the entire

corporate assets would qualify under Section 40. It does not apply (1) if the
sale of the entire property and assets is necessary in the usual and regular
course of business of corporation, or (2) if the proceeds of the sale or other
disposition of such property and assets will be appropriated for the conduct
of its remaining business. 41 Thus, the litmus test to determine the
applicability of Section 40 would be the capacity of the corporation to
continue its business after the sale of all or substantially all its assets.

Jurisprudential recognition
of the business-enterprise
transfer

Jurisprudence has held that in a business-enterprise transfer, the

transferee is liable for the debts and liabilities of his transferor arising from
the business enterprise conveyed. Many of the application of the business-
enterprise transfer have been related by the Court to the application of the
piercing doctrine. 42

In A.D. Santos, Inc. v. Vasquez, 43 a taxi driver filed a suit for

workmen’s compensation against the petitioner corporation therein. The
latter’s defense was that the taxi driver’s employer was Amador Santos, and
not the corporation. Initially, the taxi driver was employed by City Cab, a
sole proprietary by Amador Santos. The taxi business was, however,

39
Lopez Realty, Inc. v. Fontecha, 317 Phil. 216, 229 (1995).
40
See Paragraph 2, Section 40, Corporation Code.
41
See Paragraph 3, Section 40, Corporation Code.
42
Villanueva, Philippine Corporate Law, 2010 ed., p. 686, 687.
43
131 Phil. 262 (1968).
DECISION 13 G.R. No. 207161

transferred to the petitioner. Applying the piercing doctrine, the Court held
that the petitioner must still be held liable due to the transfer of the business
and should not be allowed to confuse the legitimate issues.

In Buan v. Alcantara,44 the Spouses Buan were the owners of

Philippine Rabbit Bus Lines. They died in a vehicular accident and the
administrators of their estates were appointed. The administrators then
incorporated the Philippine Rabbit Bus Lines. The issue raised was whether
the liabilities of the estates of the spouses were conveyed to the new
corporation due to the transfer of the business. Utilizing the alter-ego
doctrine, the Court ruled in the affirmative and stated that:

As between the estate and the corporation, the intention of

incorporation was to make the corporation liable for past and
pending obligations of the estate as the transportation business
itself was being transferred to and placed in the name of the
corporation. That liability on the part of the corporation, vis-a-vis
the estate, should continue to remain with it even after the
percentage of the estate's shares of stock in the corporation should
be diluted.45

The Court, however, applied the business-enterprise transfer doctrine

independent of the piercing doctrine in other cases. In San Teodoro
Development Enterprises v. SSS, 46 the petitioner corporation therein
attempted to avoid the compulsory coverage of the Social Security Law by
alleging that it was a distinct and separate entity from its limited partnership
predecessor, Chua Lam & Company, Ltd. The Court, however, upheld the
findings of the SSS that the entire business of the previous partnership was
transferred to the corporation ostensibly for a valuable consideration. Hence,
“[t]he juridical person owning and operating the business remain the same
even if its legal personality was changed.”47

Similarly, in Laguna Trans. Co., Inc. v. SSS,48 the Court held that the
transferee corporation continued the same transportation business of the
unregistered partnership therein, using the same lines and equipment. There
was, in effect, only a change in the form of the organization of the entity
engaged in the business of transportation of passengers.

44
212 Phil. 723 (1984).
45
Id. at 733.
46
118 Phil. 103 (1963).
47
Id. at 106.
48
107 Phil. 833 (1960).
DECISION 14 G.R. No. 207161

Perhaps the most telling jurisprudence which recognized the business-

enterprise transfer would be the assailed case of Caltex. In that case, under
an agreement of assumption of obligations, LUSTEVECO transferred,
conveyed and assigned to respondent PSTC all of its business, properties
and assets pertaining to its tanker and bulk business together with all the
obligations, properties and assets. 49 Meanwhile, petitioner Caltex, Inc.
obtained a judgment debt against LUSTEVECO, and it sought to enforce the
same against PSTC. The Court ruled that PSTC was bound by its agreement
with LUSTEVECO and the former assumed all of the latter’s obligations
pertaining to such business.

More importantly, the Court held that, even without the agreement,
PSTC was still liable to Caltex, Inc. based on Section 40, as follows:

While the Corporation Code allows the transfer of all or

substantially all the properties and assets of a corporation, the
transfer should not prejudice the creditors of the assignor. The only
way the transfer can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the assignor. The
acquisition by the assignee of all or substantially all of the assets of the
assignor necessarily includes the assumption of the assignor’s
liabilities, unless the creditors who did not consent to the transfer
choose to rescind the transfer on the ground of fraud. To allow an
assignor to transfer all its business, properties and assets without
the consent of its creditors and without requiring the assignee to
assume the assignor’s obligations will defraud the creditors. The
assignment will place the assignor’s assets beyond the reach of its
creditors.

Here, Caltex could not enforce the judgment debt against

LUSTEVECO. The writ of execution could not be satisfied because
LUSTEVECO’s remaining properties had been foreclosed by
lienholders. In addition, all of LUSTEVECO’s business, properties
and assets pertaining to its tanker and bulk business had been
assigned to PSTC without the knowledge of its creditors. Caltex now
has no other means of enforcing the judgment debt except against
PSTC.50

[Emphasis Supplied]

The Caltex case, thus, affirmed that the transfer of all or substantially
all the proper from one corporation to another under Section 40 necessarily
entails the assumption of the assignor’s liabilities, notwithstanding the
absence of any agreement on the assumption of obligations. The transfer of

49
Supra note 27 at 158.
50
Id. at 159-160.
DECISION 15 G.R. No. 207161

all its business, properties and assets without the consent of its creditors
must certainly include the liabilities; or else, the assignment will place the
assignor’s assets beyond the reach of its creditors. In order to protect the
creditors against unscrupulous conveyance of the entire corporate assets,
Caltex justifiably concluded that the transfer of assets of a corporation under
Section 40 must likewise carry with it the transfer of its liabilities.

Fraud is not an essential

consideration in a business-
enterprise transfer

Notably, an evaluation of the relevant jurisprudence reveals that fraud

is not an essential element for the application of the business-enterprise
transfer.51 The petitioners in this case, however, assert otherwise. They insist
that under the Caltex case, there was an assumption of liabilities because
fraud existed on the part of PSTC, as the transferee corporation.

The Court disagrees.

The exception of the Nell doctrine,52 which finds its legal basis under
Section 40, provides that the transferee corporation assumes the debts and
liabilities of the transferor corporation because it is merely a continuation of
the latter’s business. A cursory reading of the exception shows that it does
not require the existence of fraud against the creditors before it takes full
force and effect. Indeed, under the Nell Doctrine, the transferee corporation
may inherit the liabilities of the transferor despite the lack of fraud due to the
continuity of the latter’s business.

The purpose of the business-enterprise transfer is to protect the

creditors of the business by allowing them a remedy against the new owner
of the assets and business enterprise. Otherwise, creditors would be left
“holding the bag,” because they may not be able to recover from the
transferor who has “disappeared with the loot,” or against the transferee who
can claim that he is a purchaser in good faith and for value.53 Based on the
foregoing, as the exception of the Nell doctrine relates to the protection of
the creditors of the transferor corporation, and does not depend on any deceit
committed by the transferee corporation, then fraud is certainly not an
element of the business enterprise doctrine.

The Court also agrees with the CA, in its assailed April 29, 2013
resolution, that there was no finding of fraud in the Caltex case; otherwise it

51
Id. at 688.
52
3. Where the purchasing corporation is merely a continuation of the selling corporation.
53
Villanueva, Philippine Corporate Law, 2010 ed., p. 686.
DECISION 16 G.R. No. 207161

should have been clearly and categorically stated.54 The discussion in Caltex
relative to fraud seems more hypothetical than factual, thus:

If PSTC refuses to honor its written commitment to assume

the obligations of LUSTEVECO, there will be a fraud on the
creditors of LUSTEVECO. x x x To allow PSTC now to welsh on its
commitment is to sanction a fraud on LUSTEVECO’s creditors.55

Besides, the supposed fraud in Caltex referred to PSTC’s refusal to

pay LUSTEVECO’s creditors despite the agreement on assumption of the
latter’s obligations. Again, the Court emphasizes in the said case, even
without the agreement, PSTC was still liable to Caltex, Inc. under Section 40,
due to the transfer of all or substantially all of the corporate assets. At best,
transfers of all or substantially all of the assets to a transferee corporation
without the consent of the transferor corporation’s creditor gives rise to a
presumption of fraud against the said creditors.56

Applicability of the
business-enterprise transfer
in the present case

Bearing in mind that fraud is not required to apply the business-

enterprise transfer, the next issue to be resolved is whether the petitioners
indeed became a continuation of MADCI’s business. Synthesizing Section
40 and the previous rulings of this Court, it is apparent that the business-
enterprise transfer rule applies when two requisites concur: (a) the transferor
corporation sells all or substantially all of its assets to another entity; and (b)
the transferee corporation continues the business of the transferor
corporation. Both requisites are present in this case.

According to its articles of incorporation, the primary purpose of

MADCI was “[t]o acquire by purchase, lease, donation or otherwise, and to
own, use, improve, develop, subdivide, sell, mortgage, exchange, lease,
develop and hold for investment or otherwise, real estate of all kinds,
whether improved, managed or otherwise disposed of buildings, houses,
apartment, and other structures of whatever kind, together with their
54
Rollo, p. 59.
55
Caltex v. PNOC, supra note 27, at 160.
56
See also Act No. 3952 or the Bulk Sales Law. Section 3 thereof mandates that “[e]very person who shall
sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials in bulk,
for cash or on credit, before receiving from the vendee, mortgagee, or his, or its agent or representative any
part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to
deliver to such vendee, mortgagee, or agent xxx a written statement, sworn to substantially xxx of the
names and addresses of all creditors to whom said vendor or mortgagor may be indebted.”

Section 4 therein provides any person who failed to comply with the submission of the sworn statement of
creditors under Section 3 is “[d]eemed to have violated this Act, and any such sale, transfer or mortgage
shall be fraudulent and void.”
DECISION 17 G.R. No. 207161

appurtenance.” 57 During the trial before the RTC, Sangil testified that
MADCI was a development company which acquired properties in
Magalang, Pampanga to be developed into a golf course.58

The CA found that MADCI had an entire asset consisting of 120

hectares of land, and that its sale to the petitioners rendered it incapable of
continuing its intended golf and country club business.59 The Court holds
that such finding is fully substantiated by the records of the case. The MOA
itself stated that MADCI had 120 hectares of agricultural land in Magalang,
Pampanga, for the development of a golf course.60 MADCI had the right of
ownership over these properties consisting of 97 land titles, except for the 27
titles previous delivered to YIL.61 The 120-hectare land, however, was then
sold to YILPI,62 and then transferred to YICRI.63

Respondent Yu testified that he verified the landholdings of MADCI

with the Register of Deeds in Pamapanga and discovered that all its lands
were transferred to YICRI.64 Because the properties of MADCI were already
conveyed, Yu had no other way of collecting his refund.65

Sangil also testified that MADCI had no more properties left after the
sale of the lands to the petitioners:

Atty. Nuguid: And after the sale, it has no more properties?

Sangil: That’s right, Sir.

Q: And the business of MADCI was to operate and build golf course?
A: That’s right, Sir.

Q: And because of the sale of all these properties, MADCI was not
able to build the golf course?
A: Yes, Sir.

Q: And did not anymore operate as a corporation?

A: MADCI is still there but as far the development of the golf course,
it was taken over by Mr. Wang.66

[Emphasis Supplied]

57
Records, Vol. II, p. 788.
58
TSN, September 22, 2006, p. 27.
59
Rollo, p. 22.
60
Records, Vol. I, p. 161.
61
Id. at 162.
62
Records, Vol. II, p. 817.
63
Id. at 822.
64
TSN, May 28, 2004, p. 13; TSN, July 2, 2004, p. 7.
65
TSN, September 24, 2004, p. 11.
66
TSN, July 13, 2007, p. 10.
DECISION 18 G.R. No. 207161

As a witness for the petitioners, Wang testified that YIL bought the
shares of stock of MADCI because it had some interest in the project
involving the development of a golf course. The petitioners then found that
MADCI had landholdings in Pampanga which it would be able to develop
into a golf course.67 Hence, the petitioners were fully aware of the nature of
MADCI’s business and its assets, but they continued to acquire its lands
through the designated company, YICRI.68

Based on these factual findings, the Court is convinced that MADCI

indeed had assets consisting of 120 hectares of landholdings in Magalang,
Pampanga, to be developed into a golf course, pursuant to its primary
purpose. Because of its alleged violation of the MOA, however, MADCI
was made to transfer all its assets to the petitioners. No evidence existed that
MADCI subsequently acquired other lands for its development projects.
Thus, MADCI, as a real estate development corporation, was left without
any property to develop eventually rendering it incapable of continuing the
business or accomplishing the purpose for which it was incorporated.

Section 40 must apply.

Consequently, the transfer of the assets of MADCI to the petitioners

should have complied with the requirements under Section 40. Nonetheless,
the present petition is not concerned with the validity of the transfer; but the
respondent’s claim of refund of his P650,000.00 payment for golf and
country club shares. Both the CA and the RTC ruled that MADCI and Sangil
were liable.

On the question of whether the petitioners must also be held solidarily

liable to Yu, the Court answers in the affirmative.

While the Corporation Code allows the transfer of all or substantially

all of the assets of a corporation, the transfer should not prejudice the
creditors of the assignor corporation.69 Under the business-enterprise transfer,
the petitioners have consequently inherited the liabilities of MADCI because
they acquired all the assets of the latter corporation. The continuity of
MADCI’s land developments is now in the hands of the petitioners, with all
its assets and liabilities. There is absolutely no certainty that Yu can still
claim its refund from MADCI with the latter losing all its assets. To allow an
assignor to transfer all its business, properties and assets without the consent
of its creditors will place the assignor’s assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert
his claim against the petitioners as transferees of the assets.

67
TSN, September 11, 2009, p. 10.
68
TSN, November 7, 2008, p. 29.
69
STRADEC v. Radstock, 622 Phil. 431, 535 (2009).
DECISION 19 G.R. No. 207161

The MOA cannot

prejudice respondent

The MOA, which contains a provision that Sangil undertook to

redeem MADCI proprietary shares sold to third persons or settle in full all
their claims for refund of payments, should not prejudice respondent Yu.
The CA correctly ruled that such provision constituted novation under
Article 129370 of the Civil Code. When there is a substitution of debtors, the
creditor must consent to the same; otherwise, it shall not in any way affect
the creditor. In this case, it was established that Yu’s consent was not
secured in the execution of the MOA. Thus, insofar as the respondent was
concerned, the debtor remained to be MADCI. And given that the assets and
business of MADCI have been transferred to the petitioners, then the latter
shall be liable.

Interestingly, the same issue on novation was tackled in the Caltex

case and the Court resolved it in this wise:

The Agreement, under Article 1291 of the Civil Code, is also a

novation of LUSTEVECO’s obligations by substituting the person of
the debtor. Under Article 1293 of the Civil Code, a novation which
consists in substituting a new debtor in place of the original debtor
cannot be made without the consent of the creditor. Here, since the
Agreement novated the debt without the knowledge and consent of
Caltex, the Agreement cannot prejudice Caltex. Thus, the assets that
LUSTEVECO transferred to PSTC in consideration, among others,
of the novation, or the value of such assets, remain even in the
hands of PSTC subject to execution to satisfy the judgment claim of
Caltex.71

[Emphasis Supplied]

Free and Harmless Clause

The petitioners, however, are not left without recourse as they can
invoke the free and harmless clause under the MOA. In business-enterprise
transfer, it is possible that the transferor and the transferee may enter into a
contractual stipulation stating that the transferee shall not be liable for any or
all debts arising from the business which were contracted prior to the time of
transfer. Such stipulations are valid, but only as to the transferor and the
transferee. These stipulations, though, are not binding on the creditors of the

70
Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)
71
Caltex v. PNOC, supra note 27, at 162-163.
 DECISION 20 G.R. No. 207161

business enterprise who can still go after the transferee for the enforcement
of the liabilities. 72

An example of a free and harmless clause can be observed in the case

of PC! Leasing v. UCPB. 73 In that case, a claim for damages was filed
against the petitioner therein as the registered owner of the vehicle, even
though it was the latter's lessee that committed an infraction. The Court
granted the claim against the petitioner based on the registered-owner rule.
Even so, the Court stated therein that:

xxx the Court believes that petitioner and other companies

so situated are not entirely left without recourse. They may resort to
third-party complaints against their lessees or whoever are the
actual operators of their vehicles. In the case at bar, there is, in fact,
a provision in the lease contract between petitioner and SUGECO to
the effect that the latter shall indemnify and hold the former free
and harmless from any "liabilities, damages, suits, claims or
judgments" arising from the latter's use of the motor vehicle.
Whether petitioner would act against SUGECO based on this
provision is its own option.

In the present case, the MOA stated that Sangil undertook to redeem
MADCI proprietary shares sold to third persons or settle in full all their
claims for refund of payments. While this free and harmless clause cannot
affect respondent as a creditor, the petitioners may resort to this provision to
recover damages in a third-party complaint. Whether the petitioners would
act against Sangil under this provision is their own option.

WHEREFORE, the petition is DENIED. The January 30, 2012

Decision and the April 29, 2013 Resolution of the Court of Appeals in CA-
G.R. CV No. 96036 are hereby AFFIRMED in toto.

SO ORDERED.

72
Villanueva, Philippine Corporate Law, 201 G ed., p. 692.
73
579 Phil. 418, 431 (2008).
DECISION 21 G.R. No. 207161·

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

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PRESBITE J. VELASDO,\J.JR.
Associate Justice
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~~~-~RO (),full>~ ARTURO D. BRION

Associate Justice Associate Justice

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NO C. DEL CASTILLO ~ViLL"A~
Associate Justice

(On Leave)
BIENVENIDO L. REYES
Associate Justice

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ESTELA M~}JERLAS-BERNABE
Associate Justice Associate Justice

FRANCIS H. J
Associate Justice

1
DECISION 22 G.R. No. 207161

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I hereby

certify that the conclusions in the above Decision had been reached in
consultation before the case_ was assigned to the writer of the opinion of the
Court.

MARIA LOURDES P. A. SERENO

Chief Justice